Brexit: Deal or no deal

With the UK's departure from the EU looming ever closer, uncertainty over the nature of any future relationship is making life difficult for all those engaged in trade

In six months’ time, the UK will – barring a last-minute change of heart – remove itself from the EU. Even at this late stage, there is considerable uncertainty about the future relationship between the UK and the EU, its biggest trading partner, and that uncertainty is causing problems for industry on both sides of the divide.

There are a few things that are known; the UK will continue to apply the ADR Agreement and RID to the road and rail transport of dangerous goods within the country as well as in international transport. These are not EU instruments in any case, and steps are in hand to make the necessary changes to legislation, referring directly to the agreements rather than to the EU Directive that mandates their implementation.

It also seems likely that the UK will find a way to remain involved with the European Chemicals Agency (ECHA) on some basis, which will enable UK-based manufacturers to obtain the necessary registrations to allow them to place chemical substances on the EU market.

Pretty much everything else is up in the air. We are still no clearer on issues such as:

The nature or terms of any trade agreement between the EU and UK

The nature or terms of any customs agreement between the EU and UK

The collection of VAT on goods moving between the EU and UK

The ability of haulage companies on both sides to move goods between the EU and UK

The status of the land border between Ireland (EU) and Northern Ireland (UK)

It is worth stressing that the current impasse has nothing whatsoever to do with trade or economics; it is an inevitable outcome of the long-standing schism within the UK’s ruling Conservative party between pro- and anti-Europe factions. The vote on Brexit was former Prime Minister Cameron’s attempt to bridge that divide; not only did it fail to achieve that target, the schism remains and has perhaps even deepened. It is certainly making it difficult for the government to agree its position in discussions with EU over the terms of the divorce.

KNOWN UNKNOWNS

In this article, HCB has attempted to look at how (or if) those important issues are likely to be resolved and illustrate some of the the problems that will be faced post-Brexit by industries and logistics service providers on both sides of the English Channel. Trade associations have mostly been lobbying hard for a ‘soft’ Brexit, which would retain some of the benefits of EU membership, and have been working hard to try to highlight the issues. They are also trying to prepare their own members for whichever future awaits.

A recent survey by Close Brothers Asset Finance asked 900 businesses about their plans for Brexit. When asked whether they had started planning for the various possible outcomes of Brexit, 47 per cent said ‘yes’. “This kind of forward thinking is typical of the enterprise shown by UK’s SMEs,” says Neil Davies, chief executive of Close Brothers Asset Finance. “It clearly demonstrates that in the absence of certainty, businesses have taken it upon themselves to assess the impact leaving the EU will have on the supply chain, which for many businesses exposed to Europe is critical.

“Every sector we polled had some level of export dealings with Europe, which demonstrates clearly just how entwined we are with the continent and how important it’s going to be to ensure the movement of goods isn’t disrupted, both in the short and long term.”

The negotiations surrounding customs and trade are a source of trepidation for any UK company with trade links in the EU. A recent white paper published by the UK government details proposals for “a free trade area for goods” and a “facilitated customs arrangement” which aim to make cross-border trade as frictionless as possible post-Brexit. However, the rifts within the ruling Conservative party in the UK mean that it is far from certain that such proposals will come to fruition.

With this in mind, the Freight Transport Association (FTA) recently said that, if the UK wants to leave the customs union and the EU single market after Brexit, solutions need to be agreed on both the fiscal security and safety side of customs.

There are two points raised by the FTA. The first is the need for a complete security and safety waiver that will remove the need for entry and exit summary declarations. The second is the negotiation of a Mutual Recognition Agreement for Authorised Economic Operator (AEO) status, which will enable companies that are accredited on one side to benefit from the same easements on the other side.

Businesses with AEO status voluntarily meet a wide range of criteria, work in close cooperation with customs authorities to ensure supply chain security and are entitled to enjoy benefits throughout the EU. To qualify for AEO status, businesses must be able to demonstrate that they have both the policies and physical arrangements required to guarantee that the goods have been transported securely and are properly accounted for. To qualify for the linked status of Authorised Economic Operators (Customs) (AEOC), businesses must currently be able to show at least three years’ experience of meeting customs obligations.

The white paper suggests that where a good reaches the UK border and the destination can be robustly demonstrated by an AEO, it will pay the UK tariff if it is destined for the UK, and the EU tariff if it is destined for the EU. However, the usefulness of any such AEO scheme is dependent on mutual recognition. Any end-to-end process for the import or export of goods can only work if both the countries of consignment and destination are in agreement.

Currently, the government’s white paper cannot guarantee that AEO status granted in the UK will be recognised by the EU. Without mutual recognition through a full political agreement with the EU, the trusted traders concept would have little value and would not provide ‘frictionless trade’ as the white paper currently suggests.

WORKING TOGETHER

On 9 August, Chris Grayling MP, secretary of state for transport, hosted a road haulage round table with professional representatives, the Department for Transport (DfT) and other government departments to consider plans for Brexit, including a no deal scenario.

Reflecting on the meeting, Kevin Richardson, chief executive of the Chartered Institute of Logistics and Transport (CILT) said: “Logistics and transport are key to our citizens’ freedoms, security and national prosperity, and frictionless borders are essential. All must now play their part; inaction is not an option, and everyone should collaborate on creating the most effective and efficient solutions for our future outside the EU, as a significant global player.”

During the meeting, CILT requested that the government provides clarity on plans and timelines to assist businesses in their contingency planning. Furthermore, requests were made to conduct research and assess logistics capacity against the demands of the nation under different scenarios, so that major gaps, risks and the implications for private and public sector investment can be determined. This should include assessments on access to non-UK EU labour on which the profession is heavily dependent. Clearly there is not much time for such research to be undertaken.

“It is imperative that we work together to get a solution that ensures that our supply chains continue to operate without friction,” says Richardson. “Although we should be prepared for a no deal scenario, CILT will continue to highlight the disruption that such a situation will present to both UK and EU businesses and societies.

“The Institute has been consistent in its advice to government through our Brexit round table meetings, select committee responses and our involvement in advisory groups. One area that CILT has been advocating for many months is the importance of AEO accreditation as a means of supporting international supply chains in customs applications and processing.”

CUTTING TIES

The European Chemicals Agency (ECHA) is the body that administers the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH), an EU regulation that aims to improve the protection of human health and the environment from the risks that can be posed by chemicals, while enhancing the competitiveness of the EU chemicals industry.

One of the most pressing questions being asked by small and medium sized enterprises (SMEs) is: ”will the UK still be covered by REACH after Brexit?”

Back in 2016 when the result of the EU referendum was announced, It became obvious that there are two options with regard to REACH and the UK. One is that the UK could choose a new status of a non-EU country that is a part of the European Economic Area (EEA) and the single market, termed the ‘Norway model’. The other option is for the UK to choose to be part of the European Free Trade Area (EFTA) and be outside the single market but with free trade agreements, like Switzerland. The key difference between the two options is that REACH does apply in Norway but not in Switzerland.

As no mutual agreement has yet been struck between the UK and EU, by 30 March 2019 the UK will no longer have direct access to ECHA and its database and will no longer be able to participate in its regulatory and enforcement coordination. The UK will no longer have a legal obligation to maintain a national helpdesk to provide UK-based companies with advice and assistance in fulfilling their obligations under the EU chemical legislation.

With negotiations still underway, it cannot be determined what the ultimate impact of the withdrawal will be on ECHA or the economic operators within the EU. However, ECHA has stated that the withdrawal will significantly reduce the Agency’s cooperation with UK authorities.

The Chemical Business Association (CBA) has commented on the Prime Minister’s commitment “to explore the terms on which the UK could remain part of EU agencies such as those that are critical for the chemicals, medicines and aerospace industries.” The Prime Minister said that the UK would negotiate ‘associate membership’ of ECHA.

“The term ‘associate membership’ requires further clarity before industry can begin to make commercial and investment decisions based on a settled regulatory framework,” says Peter Newport, chief executive of CBA. “The industry has already invested many millions of pounds in complying with these regulations, which form a central contractual term in commercial agreements for the supply of chemicals to EU markets. Regulatory compliance is the key to market access. Without there can be no trade.”

The uncertainty caused by Brexit has already had an impact on the chemical supply chain with some companies taking matters into their own hands. CBA is aware of some member firms setting up subsidiary companies in EU member states in order to have a legal entity that can register with ECHA and place substances on the market within the EU.

NEW RULES

With negotiations currently underway, the UK has hinted that it is taking an active role in shaping new EU VAT regulations by 2020. “The government aims to keep VAT processes after EU exit as close as possible to what they are now,” according to Mel Stride, financial secretary to the Treasury.

Should Britain wish to remain inside the EU VAT area, it will continue to be bound by rules set in Brussels that are policed by the European Court of Justice. The other option is to leave the EU VAT regime, which will require infrastructure to impose VAT at borders, similar to the situation at the Swiss-German border. While it might seem an obvious choice for UK consumers, the former breaks one of Prime Minister Theresa May’s fundamental negotiating red lines and so, as with the state of customs, uncertainty still remains.

The implications of exiting the EU without a deal in place would be detrimental for many sectors, particularly road haulage. The Haulage Permits and Trailer Registration Act gives the UK a legal framework for hauliers to operate in the EU if they need permits or registrations.

The Road Haulage Association (RHA) is concerned that this Act is not enough to allow free passage to UK lorries travelling abroad within the EU if a no-deal Brexit is realised and has been campaigning relentlessly for the UK to strike a deal that maintains free access across borders. “A no-deal Brexit would be a disaster for business,” says Richard Burnett, chief executive of RHA. “Relying on permits would be like a step back in time and would mean a very limited number of UK trucks working abroad, so many firms relying on cross-border haulage won’t survive.”

According to Burnett, “the Dover Strait handles 10,000 lorries each day and processing them is currently seamless. The stark reality is that if customs are put in place, it will take an average of about 45 minutes to process one truck on both sides of the Channel. If that happens then the queues of HGVs in Kent will make the jams seen in the summer of 2015 appear as little more than waiting for the traffic lights to change.”

If a customs agreement is not put in place in March 2019, hauliers will be faced with the prospect of coming to the UK and having to wait days or even weeks before they can return home, which will be a huge deterrent to them making the journey at all.

On top of customs problems, hauliers would be required to hold a European Conference of Ministers of Transport (ECMT) permit for lorries to carry good internationally, as the EU Community Licenses that currently allow lorry movement within the EU will cease to be valid when the UK exits the EU. In the 12 months to June 2018, 3.5 million road goods vehicles travelled from Great Britain to Europe, with 2 million of these being foreign-registered vehicles. Needless to say, the increased bureaucracy will cause a massive disruption to cross-border trade.

BORDER CONTROL

Perhaps the most intractable problem concerns the land border between the UK and the rest of the EU – that between Northern Ireland and the Republic of Ireland. The border has been frictionless for people since the Irish Free State was formed in 1922 but it was a customs point for goods until both the UK and Ireland joined the EU. Few want to go back to the pre-EU days, when smuggling was a good source of revenue for the various sectarian groups involved in violence in Northern Ireland and such a move would also threaten the 1998 Good Friday Agreement, which finally ended the violence.

Extensive negotiations to avoid a hard border between the Republic of Ireland and Northern Ireland have been held but, as the departure date looms ever closer, important steps still have to be taken by both governments to ensure a seamless transition.